In celebration of small mistakes and the lessons learned

I was thinking of the paradigm that I operate in which mistakes are
considered bad while successes are celebrated.
There was a time when I made mistakes which happened in pursuit of
something. For example, I once used clothes soap on myself becuase I
thought I would be cleaner with a more powerful soap. The lesson was
learnt and never repeated.

So, it is good to make small mistakes as long as we learn from them.

--
Kalyan Madhavan

Measure of success by the number of things started rather than by the number of things completed.

If the measure of success is the number of things of things started
and completed, this can psychologically drag down the initiative to
start and try new things. So, a better holistic measure is to count
the no. of new things started.

--
Kalyan Madhavan

Discover your Inner Economist-Tyler Cowan

Three principles for distinguishing good economics from bad

1. Postcard test: It should be possible to take a good economics argument and put in n the back of a postcard.
2. Grandma test: Most arguments should be intelligible to your grandma.
3. Aha principle: If the basic concepts are presented well, economics should make sense.

Why doesn't bribing your kid to wash the dishes doesn't work?

People are motivated by external factors , such as money, and also by internal Psyche such as enjoyment, pride or wanting to d a good job for its own sake. Sometimes, payments cause external motivations to replace internal motivations. Yet for some tasks external motivations like payments can be counter-productive.

When money doesn't work, sometimes the best way to achieve results is to praise the doer for her aptitude and talent in the job, whether or not this praise corresponds to facts. For those reluctant to lie, think of this as a stab at self-fulfilling prophecy rather than as a deliberate untruth.

For rewards and penalties, it not just enough to get the mix of incentives right, you also have to know something of the values of the culture of the people you are dealing with.

Correspondence Bias (Fundamental Attribution Error)

The error is to assume that a single instance of individual behavior represents a deeply rooted personality trait. Instead the behavior is often the result of situational influences. For instance, if someone cuts ahead of us in line, we tend to assume the interloper to be a bad person. But there is a good chance that the cutter simply did not notice those ahead of him perhaps because of stress.

• Offer monetary rewards when performance at a task is highly responsive to extra effort (car salesman)
• Offer monetary rewards when intrinsic motivation is weak (wife cleans up the house for intrinsic reasons; motivating her with money to clean up is not a good idea)
• Pay monetary rewards when receiving money for a task produces social approval. Hedge fund managers receive ego boosts for their millions. They are driven individuals, obsessed with both money and status. The two rewards work in the same direction.
• High rewards tend to make individuals choke. We are afraid of making mistakes. Trying at a task and running risk of failure, brings stress and feelings of low self-esteem. Stressed people tend to confirm to social opinion. They feel out of control and so they look to group think and the security blanket of other people's approval. If a mistake is then made, it was really our fault.

Rewards and penalties fail when individuals feel a resulting loss of control. When we do apply incentives, we should frame them with respect and at least the appearance of consultation. Get the rewards and penalties out of their faces unless of course, rewards bring social status.

Bottom line is that everyone wants to feel in control of something.

Many people have deep seated emotional reasons for being late. Being early or on time sets them up for disappointment and rejection if nobody else shows up on time.

Other people are late because they are indecisive. They are not sure what to do before their appointment, which way to do it, or when they leave on time. Commitment for them is sadness and a denial of plenitude. Commitment obliterates the pleasure of anticipation and augurs only disappointment.

When it comes to art and culture we can do better by focusing on two principles of self-management incentives.

Start by asking "What is scarce?" Is it time, attention, or, in the case of owning Picasso, money?

Admit that we don't case as much about culture as we like to think that we do.

At the end of a visit to a museum, ask yourself which painting stuck with you. As week later ask the same question. Then go and read about those artists or period. This is more useful than reading the art in advance.

Economic reasoning need not be used for small decisions ("Should toilet seat be up or down?").

One way of eliciting honest answers is simply to ask for advice. When people tell us what we should do, their true selves, true desires and true world views come to light. We love being the boss so much that few people can resist unveiling their true selves in this role.

Art of Self-deception

The past self is a sacrificial victim as much as our current selves will be criticized by future selves ten years from now.

Psychologists have written about depressive realism. The depressed tend to have accurate views about their standing in the real world. Bu they are self deceive in one regard- they underestimate their likelihood of escaping depression.

People who fee god about themselves, whether or not the facts merit this judgment, tend to achieve more. They have more self confidence, tend to take more risks ad they have an easier time commanding the loyalty of others. Self deception also protects against distraction.

They key to doing well is to keep our self-deception as a general buffer, but to overcome it selectively for specific problems.

The need for control, or feeling in control, is one of our greatest self-delusions. On a more personal level, a willingness to give up control can make us better teachers. When we teach our children how to drive,w e like to pretend that they will never do anything stupid. We give them a lecture about the long list of things they should never do.

For example, we should make the kid hit the curb or make noises when she is driving. But why don't most people teach these lessons? We want to feel safe and lower our stress during and after instruction. In reality we should be less concerned with our own stress and more concerned with preparing the future driver for the real world. That means dealing with the possibility of error rather than denying it. It means managing your ability to deceive yourself; it means managing your sense of control.

What would you do if you knew you could not fail?

These words made reflect not on the world where nobody failed, but on
the nature of success and failure and how our beleif systems play into
defining each.
If I have a firm belief in my goodness, I dont have to look to the
outside world for confirmation of my own self-worth. Life becomes a
series of opportunities for learning more about me and the world
around me. N the other hand if I seek self-esteem from external
sources, any setback can become an enormous obstacle and any success
can become a dangerous ego-inflating trap.
These truths are reflected and even magnified in trading as well.

--
Kalyan Madhavan

100 % of shots not taken

In ice hockey there is an axiom which goes 'you miss 100 pct of the
shots you DON'T take'. In life too, you miss 100 percent of
opportunities that you dont ask for. Asking for help or favor doesnt
ensure that you will get it, but not asking certainly does.

--
Kalyan Madhavan

Key to your masterpiece is found in your values and your passions.

--
Kalyan Madhavan

Life as Leverage

In Finance, the concept of leverage is very key. Essentially, you get
someone else's capital to the work for you. I read an expanded
concept about leverage
Financial leverage: This is important especially in the way it works
comfortably when you own a house and the house appreciates. afterall
buying a house is a leveraged buyout.

Time Leverage: This time it is some one else's time that works for
you. Delegation of work to others is a leverage that should be
employed.

Personal Energy Leverage: We can get more out of our body and mind
through physical exercise and yoga and meditation.

Knowledge Leverage: We cab egt more out of our brain by reading and
enhancing our knoowledge and understanding.

--
Kalyan Madhavan

Trust but verify- Basis of good analysis and decision making

Evidently, Ronald Reagan used to say 'treat him like a Rabbi, check
him like a thief'. I beleive that basis of a sound logical thinking
process should be based on the foundation of 'trust, but verify'.

Why trust? When people present conclusions, manya time they take it
to personal when things are questioned about their conclusions. So,
an overt gesture of being trusting of the solution is needed for
smooth human relationships. However, we cant stop just with the trust
part since that would mean that we have abdicated the thinking and the
ownership of the decision to be made. If we are going to own the
risk of the decision, then verificatin is neccessary.

--
Kalyan Madhavan

Decision making responsibility and risk bearing responsibility

Recently I wanted my mother to send me a parcel from India through Fedex. Anu and my father also said that it is better to send it by Fedex. But my mother decided that sending it through someone was a cheaper solution although it involved switching three places through three different parties. As it always has to happen, the mail got lost.

In retrospect, I feel that I should have put my foot down and told her to follow my choice. One way of making decisions is to explain to the person (or to myself) the type of risks that are involved and come to clear understanding as to who bears the risk. Typically, who owns the risk should have a say in the choice to be made. i.e., If the risk is to be borne by another person then that person has the final say in the decision.

-- Kalyan Madhavan

Birthday,Childbirth,Toddler,Parents and all that

Two days ago,I celeberated my birthday- well sort of. A few folks wished me well. There is nothing like a birthday to muse about where I am and where I am heading next. This one is especially different- father of two daughters. I keep thinking about infusing some clarity and direction to my otherwise wayward career. What Rene said rings in my ears-be master of your own fate and be frugal. I am yet to be the master of my own fate. I have to before it it is too late.

Learn atleast one new thing everyday

I was trying to teach Kirthi about different continents. At that time
I realized how fast she is remembering things and her way of
personalizing some of the facts (Australia is where wiggles are from).
I have to make it a principle to 'learn at least one new thing every
day'.
While I feel my life is slipping into mediocrity, I have to ensure
that at least my kids are high achievers.

--
Kalyan Madhavan

Cricket-In a sunburned Country

Eventually the radio dial presented only an uninterrupted cat’s hiss of static but for one clear spot near the end of the dial. At first thought that’s all it was-just an empty clear spot-but then I realized I could hear the faint shiftings and stirrings of seated people, and after quite a pause a voice calm and reflective said: “Pilchard begins his long run in from short stump. He bowls and ..oh, he is out. Yes, he got him. Longwilley is caught leg before in middle slops by Grattan. Well, now what do you make of that Neville?” “That’s definitely one for the books, Bruce. I don’t think I’ve seen offside medium-slow fast-pace bowling to match it since baden-powell took RangaChangaBanga for maiden ovary at Bangalore in 1948” I had stumbled into surreal and rewarding world of cricket on radio. After years of patient study (and with cricket there can be no other kind) I have decided that there is nothing wrong with the game that the introduction of golf carts wouldn’t fix in a hurry. It is not true that the English invented cricket as a way of making all other human endeavors look interesting and lively; that was merely an unintended side-effect. I don’t wish to denigrate a sport that is enjoyed by millions, some of them awake and facing the right way, but it is an odd game. It is the only sport that incorporates meal breaks. It is the only sport that shares its name with an insect. It is the only sport in which spectators burn as many calories as players- more if they are moderately restless. It the only competitive activity of any type other than perhaps baking, in which you can dress in white from head to toe and be as clean at the end of the day as the beginning. Imagine a form a of baseball in which the pitcher, after each delivery, collects the ball from the catcher and walks slowly with it out to center field; and that there, after a minute’s pause to collect himself, he turns and runs full tilt toward the pitcher’s mound before hurling the ball at the ankles of a man who stands before him wearing a riding hat , heavy gloves of the sort used to handle radioactive isotopes, and a mattress strapped to each leg. Imagine moreover that if this batsman fails to hit the ball that heartens him sufficiently to try to waddle forty feet with mattress tied to his legs, he is under no formal compunction to run; he may stand there all day, and, as a rule, does. If by some miracle he is coaxed into making a misstroke that leads to his being put out, all the fielders throw up their arms in triumph and have a hug. Then tea is called and everyone retires happily to a distant pavilion to fortify for the next siege. Now imagine all this is going on for so long that by the time the match concludes autumn has crept in and all your library books are overdue. There you have cricket. But it must be said there is something incomparably soothing about cricket on the radio. It has the same virtues as baseball on the radio- an unhurried pace, a comforting devotion to abstruse statistics and thoughtful rumination, exhilarating micro-moments of real action- but stretched across many more hours and with lushness of terminology and restful elegance of expression that even baseball can’t match. Listening to cricket on the radio is like listening to two men sitting on a rowboat on a large, placid lake on a day when the fish aren’t biting; it is like having a nap without losing consciousness. It actually helps not to know quite what is going on. In such a rarefied world of contentment and inactivity, comprehension would be a distraction. “So here comes Stovepipe to bowl on this glorious summer’s afternoon at the Melbourne cricket Ground,” one of the commentators was saying now. “I wonder if he will chance an offside drop scone here or go for the quick legover. Stovepipe has an unusual delivery in that he actually leaves the grounds and starts his run just outside the Carlton and United brewery at Kooyong”. “That’s right, Clive. I haven’t known anyone start his delivery that far back since Stopcock caught his sleeve on the reversing mirror of a number 11 bus during the third test at Brisbane in 1957 and ended up at Goondiwindi four days later owing to some frightful confusion over a changed timetable at the Toowoomba junction” After a long silence while they were absorbed in thought, and possibly stepped out to transact some small errands, they resumed with leisurely discussion of English fielding. Neasden, it appeared, was turning in a solid performance at square bowel, while Packet has been stalwart in the dribbles, though even these exemplary performances paled when set aside the outstanding play of young Hugo Twain-Buttocks at middle nipple. The commentators were in calm agreement that they had not seen anyone caught behind with such panache since Tandoori took Rogan Josh for a stiffy at Vindaloo in ’61. At last Stovepipe, having found his way over the railway line at Flinders street-the footbridge was evidently closed for painting-returned to the stadium and bowled to Hasty, who deftly turned the ball away for a corner. This was repeated four times more over the next two hours and then one of the commentators pronounced:” So as we break for second luncheon, and with 11,200 balls remaining, Australia are 962 for two not half and England are four for a duck and hoping for rain” I may not have all the terminology exactly right, but I believe I have caught the flavor of it. The upshot was that Australia was giving England a good thumping, but them Australia pretty much does. The mystery of cricket is not that Australians play well, but that they play at all. It has always seemed to me a game much too restrained for the rough and tumble Australian temperament. Australians much prefer games in which brawny men in scanty clothing bloody each other’s noses. I am quite certain that if the rest of the world vanished overnight and the development of cricket was left in Australian hands, with a generation players would be wearing shorts and using the bats to hit each other. And the thing is, it would be a much better game for it.

Search within yourself

Although we might receive inputs in decisions, the search for answers are always within ourselves. We wone the answers and the consequences of foollowing up with the answers we decide.

Dagnino's Business Cycles

Dagnino's Business Cycles

Leading Indicators
MZM (pct chg.)
Dollar to major other currencies
Yield Curve (10 yr to T bills)
Stock Market (pct chg.)
Bond Yield quality (BAA and 10 yr spread)

Real int rate 13 wks to treasury bills
(if real int rate is cheap this inflationary and hard assets go up)
Financial cycles lead the business cycle
cost of running a business
int rates
raw materials
labor cost

Coincident indicators
Industrial production
Orders for durable goods (pct chg)

Lagging Indicators
Interest rates
treasury bills
Commodities (crb commodity futures index)
CRB spot industrials inventories (pct)
Inventory

No emotions
de detached from the process
think performance
zen in doubt act
concentrate on few positions.

Layoffs and the desire to be the master of your own destiny

FHLBC will be shedding employees perhaps for the first time in its history. Lives of folks are going to change especially because a job at this bank is considered a lifetime employment.

Amidst this news I am left contemplating about whatI should do. I don't see much of a career at the bank. I am also convinced that the team in its present form will not cut it for raising capital. I am enamoured about making it on my own as a consultant. What I really want to do is to manage money using mathematical models. I Should start a money management outfit.

Mean Gene, Come into my trading room

I rapidly read Terry Burnham's 'Mean Gene' as well as Alexander Elder's 'Come into my trading room' during the weekend of April 22.
Mean Gene offers a biological explanation of why we do most of the things we do- take risks,

Elder's book had some gems of information about trading and risk management- all of which I have flouted! Elder recommends a trading journal with all the reasons to enter the trade as well as determining the stop loss set up BEFORE you enter the trade. He also talks about not risking more than 2 pct of capital on one trade and not more than 6 pct at any given point in time.

Short History of Nearly Everything

I am reading/listening to Bill Bryson's book- fascinating history of the earth, earthquakes, volcanos, quantum physics etc.

Short History of Nearly Everything

I am reading/listening to Bill Bryson's book- fascinating history of the earth, earthquakes, volcanos, quantum physics etc.

Happiness -Whence

Happiness is a function of age. When you are young, happines comes from achievements. As you grow older, happiness comes from relationships. -- Kalyan Madhavan

Principles in Life

With the birth of my second child, I think about what are things that I want to teach my kids. There are things that I have done right and wrong and haven't done. It is tough to develop a compendium of these experiences just like Aesop's fables, and derive a moral from each episode. What is needed is a distilled set of principles that the children can always fall back on. Here are some. This list, like me, is a work in process!

• Choose something that you are in the 90th percentile are better. Very few things help you make a living when you are in the 50th percentile of that profession.
• Believe in yourself. If you dont respect yourself, don't expect others to respect you.
• Know yourself. Experiment with small things and see how you react to various results.
• Look for inspirations in life. It could be inspiring people or inspiring moments.
• Don't try to please everyone. You end up pleasing no one. Decide on who are the folks who are important in your life and concentrate on them.
• Many a time we dont have perfect information about the consequences of changes that we make. The fear shouldn't stop you from making changes.

-- Kalyan Madhavan

Innocence and Idiocy

Self-professed ignorance when you are really young can be considered a shade of innocence, but when tried any at other time of life is just raw idiocy

Self-confidence: The ultimate make-up

I have encountered differing roles of self-confidence in two dichotomous ways. An analytic person who is in pursuit of knowledge and truth is prone to be less-opinionated and self-effacing so that it is easy to elicit various thoughts from different individuals. Once these ideas are obtained then one's power of logic can be used to sift through ideas and accept the ones that stand the test of logic. Self-confidence, in this context, becomes a not so welcome characteristic. However, in the world of business, the degree of self-confidence that an individual possesses is a key indicator of career success-in fact, self-confidence creates opportunities for success which then breeds on itself (except in the rare case where the confidence to talent gap is big and in the wrong direction!). The fact that there are no absolute rights and wrongs in the world of business (unlike the world of math, for instance) makes self-confidence the key characteristic that replaces the depth and quickness of logical thinking as primary indicator of success. Of course, it always helps to have both self-confidence and the intellect. Having straddled both the worlds, I am inclined to justify the action of being self-confident in the business world as follows- If you don't feel like betting on you and your skills, it is unfair to expect someone else to bet on you. The sexist interpretation that I have heard from my boss is that among all the different make-up that he likes, self confidence is the one that he likes most!

Mean markets and Lizard Brains

I am reading Terry Burnham's book called "Mean markets and Lizard Brains- How to profit from the new science of irrationality"

The central thesis of this book is that humans act irrationally in certain circumstances. This irrationality is called the "lizard brain" which has a backward looking aspect to it and is built to look for patterns that have worked well in the past. Investing, unlike other ancestral tasks, requires staying a step ahead of others. For investing, the only rule is to predict what everyone else is doing and move to profit from their behaviour.

Shackle the lizard brain

• Don't trade emotionally
• Never trust anyone, not even yourself
• Losers average losers
• Do not dollar cost average (because losers average losers!)
• Don't open your mutual fund statements (Keep financial news flows consistent with your decision frame)
• Spin control yourself (Look at your financial position in an aggregate fashion)
• Keep options to decide when to go all in (Keep your investment position conservative enough to preserve both options of increased risk or decreased risk should others panic and present you with an opportunity)
• Avoid impulsive trades. Remove temptation; don't expect to resist it Reduction of Financial Risk
• Allocate more money to low-risk assets
• Buy short-term bonds
• Live in a smaller house
• Have a fixed rate mortgage
• Invest in other currencies (or buy stocks in firms that make money outside of US)
• Pay off your debts
• Seek a secure pay check

Keys to Profiting from Mean Markets

Be Different

Buy when others are selling and sell when others are buying. Success requires using cognition to control the lizard brain

Make investment moves that do not produce dopamine

Another key to making money is to buy those that haven't done well and selling those that have done well. Our brains are actually bathed in pleasure causing dopamine when we take actions that we have done before. But financial markets are the worst environments in which to use the stimulus response process. To make correct financial decisions, we have to do exactly the opposite of what has been giving us our emotional reward.

Make an emotionally realistic financial plan

Successful investors must be aware of their own irrationality and craft plans that anticipate and preempt moments of irrationality

Be tough enough to stick to the plan

-- Kalyan Madhavan

Imperfect Understanding is the Human Condition

Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes. - George Soros

The dream of freedom through entrepreneurship

I was talking to Ashish who has decided to freelance on his own and
has been doing very well. I was very proud of what he has done. I
realize that the dream of freedom is innate in all of us and the
desire to create your own system or be enslaved by another man's is
so true.

--
Kalyan Madhavan